PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending October 26th, 2014

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Premium LNG Buyers Are Few and Far Between in Asia, while Open Issues Tied to the Implementation of Capacity Markets

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With recovery of fixed costs for fossil fuel units becoming more challenging, capacity mechanisms are now starting to be implemented across Europe.

NYC-based PIRA Energy Group believes that premium LNG buyers are few and far between in Asia. In the U.S., gas injections are below expectations, but futures fall. In Europe, fundamentals weaken, place more weight on Ukraine for price support. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Premium LNG Buyers Are Few and Far Between in Asia

While some of the smaller and more remote terminals in Japan and China with limited storage capacity pay premium prices for spot cargos, the high stock situation overall has many buyers sitting back until a demand-driven reason justifies more buying. Throw in a large increase in spot availability from Indonesia over the next 12 months and softer oil prices, and we are left assuming a weaker price outlook even if Japanese nuclear capacity remains offline.

Gas Injections Below Expectations, But Futures Fall

The EIA’s reported 94 BCF storage build for the Reference Week fell modestly below consensus expectations in the vicinity of 96-98 BCF. Comparisons to last year and the five-year average were mixed. The 8 BCF year-on-year increase was the smallest in more than two months, while the 24 BCF gain relative to the five-year average was the second highest since mid-August.

Fundamentals Weaken, Place More Weight on Ukraine for Price Support

Spot prices in Europe will remain in a holding pattern at current levels until a Russia/Ukraine deal is officially completed or not completed. Either way, it appears that the uncertainty is the most bullish aspect of the market rather than certainty if the deal will get done. With the potential for a final deal now pushed back another week or more (next stop, Brussels), changing a net position in the market seems risky, but it does appear that the case is building for weaker day-ahead prices.

NYC-based PIRA Energy Group reports open issues are tied to the implementation of capacity markets. Seaborne coal prices rise despite predominantly weak fundamentals. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Open Issues Tied to the Implementation of Capacity Markets

With recovery of fixed costs for fossil fuel units becoming more challenging, capacity mechanisms are now starting to be implemented across Europe. German policy makers do not appear to be in a rush so far to implement mechanisms for several reasons, ranging from the current overcapacity in the system to the need to keep system costs down. However, the discussion on capacity markets is now also set to heat up in Germany, with a “Green Paper” set to be published in November.

Seaborne Coal Prices Rise Despite Predominantly Weak Fundamentals

After a string of weeks with little else than bearish developments, market sentiment was decidedly more bullish last week. Stronger dry bulk freight rates, a modest rebound in oil pricing, and rumors that the Chinese tax on imported Australian coal would be lifted caused prices to rise. While the rise in dry bulk freight rates largely explains the strength in API#2 (Northwest Europe) relative to FOB Newcastle (Australia) pricing, PIRA believes the stronger rally in API#4 (South Africa) over FOB Newcastle is largely misplaced, as Atlantic balances remain bloated.

PIRA Special Report: Outlook on Power, Coal and Environmental Markets

International markets impact North American markets, sometimes in very direct and immediate ways, and sometimes in indirect and lagged ways. This report gives an overview of global and North American developments in power, coal, environmental and clean energy markets. In addition, we address some strategic implications of “microgrids” and challenges ahead for vertically integrated utilities in what we believe will be the end-user-driven markets of the next decade.

The information above is part of PIRA Energy Group's weekly Energy Market Recap- which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

Click here for additional information on PIRA’s global energy commodity market research services.

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